THE IMPACT OF FIRMS’ CAPITAL STRUCTURE ON CAPITAL EXPENDITURE THE CASE OF MANUFACTURING COMPANIES IN JAPAN, KOREA AND TAIWAN

Abstract

The influence of firms’ capital structure has been discussed widely in existing literature. Prior theoretical and empirical works on capital structure suggested that there is a connection between how a firm is financed and its investment. With a sample of firms in the manufacturing sector in Japan, Korea and Taiwan, this study investigated the relationship between capital structure and capital expenditure (investment). By adopting empirical models from earlier papers, I first determine over- and under-leveraged firms by calculating their leverage deficit, followed by a regression model between leverage deficit and capital expenditure. Overall, my results reliably confirm the effect of capital structure on capital expenditure, in which firms’ leverage deficit negatively impact the level of their capital expenditure. In addition, the explanatory power of determinants of capital structure estimated by my model is generally in line with the results of prior studies on the topic. Nevertheless, emphasizing on sample-specific deviations from previous research observed in the regression models’ results, the study shows that for firms in Japan, Korea and Taiwan, the pecking order theory may be better suited to explain the response in leverage to growth opportunities, and investment in the current year reacts differently to that of prior years.